As you probably/hopefully noticed on Thursday, the DAX hit a record following the announcement of the ECB taper and unquestionably, one reason why is because by slapping a dovish bow on an announcement about paring back asset purchases, Draghi managed to drive the euro lower, thus supporting European equities.
But just because everyone heard what they wanted to hear (namely that although the pace will slow, the purchases will continue and could be ramped back up if the proverbial shit hits the fan in the periphery, and also that “well past” means “well past”) doesn’t mean the ECB didn’t announce what they announced.
Plus, if you really wanted to, you could interpret the dovishness as either a tacit admission that the market simply cannot stomach anything that even approximates real conviction on normalization or that Draghi actually sees real risks on the horizon or probably both.
Events in Spain on Friday underscored the fact that all is not in fact well in what is less a unified bloc and more a loose confederation of nation states with economies that are so disparate as to make the whole idea of a union implausible.
With all of that in mind, here’s former trader Richard Breslow to send you off to the weekend on a characteristically dour note…
Via Bloomberg
It’s apparently de rigueur to look at the response of the Dax index to the Draghi press conference and conclude he must have done a masterful job. But trust me, stocks didn’t shoot up by two percent because the well telegraphed reduction in the Asset Purchase Program was a signal that all is well in Europe. He delivered the most dovish taper announcement possible and traders got the message they so wanted to, yet feared to hope for, hear.
- The central bank has your back. And the rest of the upbeat story is just sleight of hand. Everyone in the audience is sitting back smiling while the cast of the ECB Governing Council is singing “Ya Got Trouble” from the Broadway hit, The Music Man. And we all know that’s a love story about a con
- Talking about how well Europe is doing is ubiquitous. And if you add up all the numbers and divide by 19 there has been noticeable improvement. But that doesn’t mask the fact, to a man as smart as the ECB president, that it remains a deeply uneven recovery and, thus, a highly fragile union. All those caught in the lost generation of the unemployed are in danger of being assumed away by economists on the outside looking in. But a majority of the Council realizes this won’t work in the real world. Remember, the most vocal, if not the only, criticism of the dovishness came from a cadre of Germans.
- The market quite understandably fell for the hype of betterness given Draghi’s remarks at Sintra this summer, and is making up for it quickly. The Euribor strip is shifting higher and now prices a first measly 15 basis point hike out to the third quarter of 2019. That on top of the “we stand ready to do more buying if needed” messaging is a very negative commentary on the real state of things. Jeez, what does he know that we don’t?
- Much was made of the lack of mentions about the currency. Lots of people put it down to comfort with a stronger euro in the face of improved fundamentals. The real reason is he knew he was going to trash the euro and needn’t bother piling on or being seen overtly doing so. The rising rate spread to the dollar is only going to enhance the pressure
- It feels like yesterday will be as good as the news gets once investors start thinking about it
Yogi Berra comes to mind “this seems like deja vu all over again”.